Hey nerds. Here is my situation, hoping to get some a) opinions on what you all would do in my shoes and b) help me understand the tax implications because I’m a total newb at this stuff.
The situation: I have the opportunity to sell up to 10% of my vested shares.
I have vested a total of 11,500 shares to date, so I can sell up to 1,150 shares.
My first grant was 4,000 shares in April of 2021.
My first exercise was for 2,500 shares in December of 2021. I exercised again in January of 2022 for 3,500 shares.
When I exercised, the strike price was $4 and FMV was about $14. I don’t know which matters for purposes of taxes, my understanding is that by exercising, my basis was moved from $4 to $14 but I’ve no idea what I’m doing here.
An investor is offering $43, so that’s my offering.
I think those are the pertinent details. I’m optimistic about the company, we have good leadership, we are cash flow positive, revenue growth is around 35-40% for this year. But obviously a lot can happen, and a bird in the hand, I’m leaning towards selling even if it means eating a huge tax bill. I’ve got 16,000 options total including un-vested shares and that grows every year so I’m still preserving a lot of upside.
How would you avoid a huge tax bill? Sell everything the year you plan to retire?
I would definitely sell 10%. It is currently worth 1,150 x 14 = 16,100 and you’re being allowed to get 1,150 x 43 = 49,450 for it. Even after taxes you must be at least 50%+ ahead.
If you can donate the shares to charity and they can sell for $43 then you can write off $43 / share on your itemized deductions and no one ever has to pay the tax on the difference between $14 & $43.
I assume you already paid the tax on the difference between $4 & $14 when you exercised. That was probably on your W-2.
So if you were going to give money to charity anyway, that is the most tax-efficient way of doing it.
If you weren’t going to give money to charity anyway then it’s a different question. Still seems like a good move.
I would say sell the 10% of vested shares and diversify out of your employer. Profit ($43 - $14) x (1,150) = $33,350. Put 35% aside for taxes ($11,700) and then take the other $21,650 and put half into an S&P 500 index fund, put the other half into a “fun” trading account.
You’ll retain some upside, you’ll lock in some profits, and you will feel like you’ve gotten some value out of your vesting.
I think from a pure tax perspective, exercising after retirement is the most efficient, as my income will be low. But that leaves a lot of other risk on the table so I doubt I’ll carry this that long.
Oopsie, I think FMV wasn’t the term I wanted. The $14 is more like book value. Either way.
I would consider donating some, but I don’t think that’s allowed, it appears that since I own the options, I’m the only one who can exercise them. Best I can tell, but great idea.
I actually didn’t pay taxes when I exercised, it’s some weird calculation where you only have to pay taxes if you’re subject to AMT, and I bought few enough to stay under the wire. But, as I understand it, I still get to step up my basis to $14 and only pay taxes on the ($43 - $14) gain. I’m gonna call my CPA.
I’m very much leaning towards selling. My profit is actually ($43 - $4) x $1,150, so more like $44k. Since I was awarded the options >2 years ago and exercised them >1 year ago, the article I’m staring at now says I’ll be hit with cap gains taxes of 23.8%. Which is better than income tax if true. So I’m on the hook for like $10k in taxes, I’d throw $12k into savings to be safe.
I just learned about this so I’m not sure what I’d do with the money. My first thought is to put half in the S&P, and use the other half for home renovations. The old house needs something like another $100k before it’s fully updated. Roof, HVAC, windows rebuilt, new porch, bath.
Well your takeaway would be around $46K after taxes, so that’s almost half of your home repairs. I’m a little bearish on the market right now. I’d be tempted to throw it all into the house. But there’s no wrong answer.
And that’s assuming it’s all taxed at 23.8% (which is a very plausible number: 20% long-term capital gains plus 3.8% investment income).
I still think the 14-4 part might get taxed as ordinary and show up on your W-2. Certainly review your W-2 very carefully as well as your tax return to make sure you pay tax on that piece exactly once.
One question you didn’t answer: how do you feel about the amount you have in your employer’s stock+options relative to your total assets? Do you think diversification would be wise? If so, absolutely sell some.
I’m guessing this is private company stock rather than a publicly traded stock. You may have fewer opportunities to sell private stock and you’d have more ways of selling/donating public stock.
The language in the next 2 statements makes it seem like you are sometimes using the word “options” to describe a few different things. Based on your descriptions it sounds like you have vested options, unvested options, and vested stock that you got when you exercised some vested options. It’s possible you might have unvested stock as well.
Finally, you mention putting some of the proceeds in the S&P. If that’s a diversification move, it makes sense. However, if you are comfortable with the diversification you have now the statement below makes me wonder if Company prospects might have more upside.
6,000 shares of company stock, acquired through exercising options
5,500 vested options that I’ve not yet exercised
4,500 un-vested options
Assuming the current $43 valuation holds, this is a sizeable chunk of money, and as a general rule (#conservativeactuary) I’d prefer to not have a ton of money tied up in company stock, since I work here. You know, the risk of the stock tanking and me losing my job are correlated (but hopefully no causation, lol). So, I’m inclined to sell unless there’s a really compelling reason not to.
It doesn’t sound like there will be much benefit in waiting until retirement, unless you are sure you will fall into what is now the 12% tax bracket. If you’ll fall into the 22% bracket, that’s almost certain to go up in the next few years, so it won’t be much different from the 23.5% tax you will pay now.
I think these will be cap gains taxes, so if I could get my income way down in retirement then I could push down my cap gains rate. And that might happen but it’s not a sure thing. Plus there’s risk in waiting.
By all means sell some. Being presented a nice opportunity to take some profit when you want to diversify anyway, jump on it IMO.
That’s already a lot of leverage, and if the company continues to perform well you have a lot of upside. You’ll have to decide on the vested ones when you want to lock in some profit, or whether you like that upside potential from holding the option. As you did with your last batch, generally a good thing to exercise the options then hold the shares for at least a year so you get long term capital gains treatment on the shares.
Since we are private, we have few opportunities to sell, the last was two years ago. The price was lower and I didn’t sell. Basically, from time to time an investor wants to buy more stock than we are willing to issue, so this gets the investor the shares they want and lets the employees have a bit of liquidity. So I may not get another bite at the apple for a year or three, unless we happen to IPO.
I’m really not seeing any reason not to sell here, it’s 7% of my total stake and I’m happy to take a few chips off the table.
Thanks for the comments, everyone. I wound up exercising this sale for 1,150 shares - shares which I purchased in 2021. That should, as I understand it, result in paying long-term cap gains on this deal which saves me a bit on taxes. So, net profit is about $44k but since I already purchased these, I’ll be getting a check for bang on $50k. It’s not life changing but that’s a big windfall.
The sale cleared today and funds are being wired to me next week. I’m going to call my accountant to confirm but I think I’ll be subject to 15% cap gains, which is about as favorable as it gets.
Plan is to save about a third, and the rest will go towards home projects. This plus my bonus will put a nice dent in that.